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Stimulus, a Q&A

Globe and Mail Update

From Saturday's Globe and Mail — How bad is it?

Pretty bad. The Finance Department polls 16 private-sector economists to get a sense of where the economy is headed. In December, the average forecast was that the economy will shrink 0.4 per cent this year. That would be the first annual contraction since 1991.

What will it take to jump-start the economy?

The International Monetary Fund is pushing governments to come up with spending programs equal to 2 per cent of their gross domestic products. Canada's economy is equal to about $1.5-trillion. If Canada uses the IMF's yardstick, that means the country's politicians need to come up with combined stimulus of about $31-billion.

Is the onus entirely on the federal government?

Technically, no. The IMF simply says it will take stimulus equal to 2 per cent of gross domestic product to spark economies out of recession. The fund's economists don't so much care who spends the money. That means the provinces could give Finance Minister Jim Flaherty a hand, and probably explains why the minister called on provincial governments this week to do their part.

What is Ottawa considering doing?

Mr. Flaherty and Prime Minister Stephen Harper haven't committed to anything yet. They are considering putting more money toward infrastructure, tax cuts, boosting employment insurance benefits and using the federal treasury to unblock credit markets. They've already promised to spend about $4-billion to bail out the automobile industry.

What works? What doesn't?

Spending on infrastructure projects such as new broadband Internet cables and port upgrades meets with universal approval. After that, there's little agreement. The point of an economic stimulus program is to inject money into a deflating economy. That's why direct spending on infrastructure works. Cutting taxes could also achieve that goal, except that at a time of economic uncertainty taxpayers are apt to save at least some of that tax cut. Many economists like the idea of lengthening the amount of time unemployed workers can collect benefits because it's a way of targeting the victims of the financial crisis. The root cause of the global recession is a lack of confidence in credit markets. Governments around the world are spending hundreds of billions of dollars buying and guaranteeing securities in hopes of injecting enough money into markets to give financial institutions the money they say they need to resume lending to businesses and consumers. Governments are expressing some frustration that banks are simply hoarding the money to protect themselves from a coming wave of defaults.

Is a stimulus program really necessary?

History suggests the Great Depression and Japan's decade of economic stagnation could have been avoided if policy makers had acted faster to restore confidence and bring demand back to life. Almost every other major economy in the world has already pledged tens of billions to do their part to reverse the global recession, and Canada would risk accusations of being a free-rider of it opted to do nothing. Also, is there a politician alive who would dare sit idly by as thousands of constituents lose their jobs?

Can Canada afford a stimulus program?

If there's a country that can finance a big stimulus program, it's Canada. Former prime minister Jean Chrétien and Mr. Harper have been paying off the debt for more than a decade. Canada's debt as a percentage of gross domestic product is about 22 per cent. The next closest major economy is the United States, at more than 40 per cent. The one definitive thing Mr. Flaherty has said about his budget is that it will include a plan to pay back whatever he decides to spend on stimulus.

What are the risks of a big stimulus program?

Most economists say the bigger risk is not doing one. Still, some point out that once politicians start spending, it's difficult to stop. There's also a possibility that the prospect of deficits spooks taxpayers, causing them to save their money rather than spend it.

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